Mapping the Mortgage Interest Deduction Debate

San Francisco's homeowners, who pay some of the highest home prices in the country, took the highest average deduction, at $23,900.

If the tax deduction for mortgage interest were taken away today, not every taxpayer would suffer alike, according to a new report from the Pew Center on the States.

A nation-high 37 percent of Marylanders who file tax returns took the deduction in 2010, the Pew report said. Only 15 percent of West Virginia and North Dakota filers do so, 10 percentage points below the national average of 25 percent.

Two of those states also bookend the nation when it comes to the average amount deducted per tax filer: $4,580 in Maryland, versus $1,192 in North Dakota.

Don't expect Maryland's congressional delegation, in other words, to be leading a fight to strike the deduction from the tax code, as some tax-reform advocates have suggested, or North Dakota's representation to be defending it. But the Pew report shows that the politics of the mortgage deduction could be more complex than the top line numbers suggest.

The deduction for mortgage interest has been targeted as a boon mostly for the wealthiest taxpayers in the richest areas of the nation. "Taxpayers and the entire economy would be better served by removing the mortgage interest deduction and lowering marginal tax rates to offset the change," wrote researchers from the Mercatus Center at George Mason University earlier this year.

The Pew report gives these critics more fodder. "Not surprisingly," Pew wrote, "the report shows that the geographic distribution of this tax expenditure generally is skewed toward areas with relatively high incomes and property values."

Those who use the deduction to best advantage are clustered on the country's two coasts and in the posher suburbs of major heartland cities. Among the metropolitan areas tracked by Pew, San Francisco's homeowners, who pay some of the highest home prices in the country, took the highest average deduction, at $23,900.

But other factors determine who takes the deduction, including the number of filers who itemize and the proportion of renters to owners, and how long people stay in their houses. Because mortgages are structured so that borrowers pay more interest at the beginning of the loan's life than at the end, a housing market with frequent turnover will generate more mortgage interest, and more deductions, than a more stable one.

These ancillary factors explain why New York City, full of wealthy neighborhoods with mind-bending real-estate prices, ranked relatively low on Pew's list. Because many of New York City's tax filers rent their homes, they claimed mortgage interest less than 20 percent of the time, half the frequency in Minneapolis.

"There are a lot of factors," said Anne Stauffer, a project director at Pew Charitable Trusts. "What we're trying to put on the map, so to speak, is a sense of which factors most affect different areas."

Politicians and policymakers are studying data like Pew's as they consider the impact on those different areas of the various options for reining in the deduction: eliminating it altogether, limiting it to first homes, replacing the deduction with a credit, or capping itemized deductions as a whole, which would affect mortgage interest for most homeowners.

Pew's study shows that the politics of modifying the deduction are likely to be wicked. California, a populous state and a wealthy one, has the largest number of representatives in Congress. Its citizens also make up more than 11 percent of those who deduct their mortgage insurance nationwide.

Changing the deduction could split states themselves, pitting rural areas against cities In North Carolina, according to the report, some residents of the state's rural eastern half of the state would lose less than $1,700 per taxpayer (and many taxpayers none at all). Around Raleigh and Charlotte, the deduction yields the average taxpayer deductions of $3,600 and up.

Texas had the biggest differential, with taxpayers in the high-tech university town of Austin taking the deduction 28 percent of the time, while in the west Texas town of Odessa, just 7.5 percent of filers claimed mortgage interest, the lowest percentage for any metro area in the United States. In Austin mortgage interest meant a deduction of nearly $3,000 per taxpayer; in Odessa less than $500.

But the key number for homeowners may be found back in Maryland, particularly the suburbs north of Washington, D.C. In the metropolitan corridor from Bethesda to Gaithersburg, home to some of our wealthiest and best connected citizens, nearly 41 percent of filers took the deduction in 2010, the greatest percentage in the country.